Georgia: Medium-Term Growth Prospects and Policies1
Growth in Georgia averaged 5.6 percent per year from 2003–2023. This was mainly driven by a combination of high investment and structural transformation out of agriculture and towards higher productivity services. However, trend growth has slowed in more recent years and was around 4.5–5 percent prior to the pandemic. Looking ahead, demographic headwinds are likely to be a further drag on growth. This chapter estimates potential growth in Georgia and examines the roles of productivity, labor, and capital in driving growth. It finds that, to raise growth, Georgia should focus on improving agricultural productivity, increasing competition in manufacturing and service sectors, and investing in public infrastructure.
A. Historical Growth in Georgia
1. Georgia’s growth has been consistently strong over the last twenty years, averaging 5.6 percent per year from 2003–2023. This was likely supported by the broad range of structural reforms Georgia undertook over this period reducing corruption, simplifying the tax system, and liberalizing product markets (IMF 2022, 2023). However, much of this growth also likely reflects the forces of economic convergence, given Georgia’s low level of GDP per capita compared to comparator nations. When compared to the neighboring countries of Armenia and Azerbaijan who had similar per capita GDPs in 2003, Georgia’s growth rate has been remarkably similar (Figure 1).
Economic Convergence, 2003–2022: Georgia and Selected Comparators
Citation: IMF Staff Country Reports 2024, 136; 10.5089/9798400275081.002.A002
Source: World Development Indicators, IMF staff calculationsDecomposition of Georgian Growth, 2003–2023 (percent)
Citation: IMF Staff Country Reports 2024, 136; 10.5089/9798400275081.002.A002
Source: NBG, IMF staff calculations2. Investment has been the largest contributor to growth, accounting for an estimated 65 percent of growth over this period2 (Figure 2). The remaining 35 percent of growth can be accounted for by total factor productivity (TFP) growth. However, this reflects two very distinct periods: 2003–2013, where growth averaged 6.2 percent and was broadly balanced between TFP and capital growth, and 2012–2023, where growth averaged 4.9 percent and was predominantly driven by investment (70 percent). An aging population and outward migration have meant that labor supply has contributed little to overall growth over either of these periods.
3. Using a model developed by Grant and Chan (2017),3 staff estimate that trend growth declined from above 8 percent in the early 2000s to around 5 percent prior to the pandemic (Figure 3). This is slightly above the 5-year average for this period of 4.7.4 The choice to only look at growth up to the pandemic is made because both the pandemic and then subsequently Russia’s invasion of Ukraine represent such large shocks to Georgia’s economy that it is too early to infer what impacts these might represent for longer-run growth in the country. Box 1 highlights some of the potential channels through which Russia’s invasion of Ukraine may affect growth in Georgia in the longer term.
Trend Growth in Georgia (percent)
Citation: IMF Staff Country Reports 2024, 136; 10.5089/9798400275081.002.A002
Source: IMF staff calculations based on Grant and Chan (2017)The Impact of Russia’s War in Ukraine on Georgian Potential Growth
Georgia experienced high growth in 2022 and 2023 in large part due to spillovers from Russia’s war in Ukraine. Growth in Georgia in 2022 and 2023 was 11 and 7.5 percent respectively (Figure 1). This was in part due to over 100,000 migrants from Belarus and Russia moving to Georgia in 2022 (German Economic Team (GET), 2023). Many of these were tech workers with the ability to work remotely, contributing to a roughly 50 percent expansion in ICT as a share of GDP in Georgia from 3.9 percent in 2021 to 6.7 percent in 2023. Along with migrant inflows, money transfers into Georgia also increased by 85 percent in 2022 relative to 2021 and remain elevated (Figure 2).
GDP Growth in Georgia (percent)
Citation: IMF Staff Country Reports 2024, 136; 10.5089/9798400275081.002.A002
Source: GEOSTAT, IMF staff calculationsMoney Inflows to Georgia Relative to 2019
(percent)
Citation: IMF Staff Country Reports 2024, 136; 10.5089/9798400275081.002.A002
Source: Haver AnalyticsRecent high growth is unlikely to be informative about medium-term growth in Georgia. Most of the positive impacts of growth in 2022 and 2023 from war-related spillovers can be best thought of as on the level of GDP rather than the growth rate. The population increase through migration will raise GDP mechanically as these migrants spend and work in the economy. With the recent migrant inflows, this impact may be greater than their share of the population as evidence suggests they have incomes over three times the Georgian average (GET, 2022). Similarly, Georgia is likely to have seen benefits to growth due to the substantial lari appreciation generated by the corresponding money inflows. Using a sign restricted SVAR, staff estimate that the roughly 70 percent appreciation of the lari since February 2021 has led to an increase of growth by around 2.5 percentage points.1 Both effects though are one-off boosts to the economy; unless elevated migration or appreciation continue, these effects will wane. Furthermore, there is even the risk that, depending on the resolution of the war in Ukraine, these effects will reverse should recent migrants either return to their home countries, or move to other countries over time.
Evidence does suggest though, that if the recent migrants settle permanently in Georgia, they may contribute to an increase in per capita GDP growth over the medium term. Jaumotte and others (2016) find for advanced economies an increase in the migrant share raises long-run growth, primarily by increasing labor productivity. This is supported by studies such as Ortega and Perri (2014), which finds a positive link between openness to migration and long-run income per capita. The precise mechanisms at play are less well established, especially for emerging economies. However, evidence for the US suggests that migrants are both higher skilled than the native population and more likely to start their own businesses (Azoulay and others, 2022). Given that many recent migrants to Georgia seem to be disproportionately high-skilled individuals working in sectors such as tech, this likely supports these potential mechanisms. It is too early in this process to include these possibilities in our central assessment of trend growth in Georgia, but this is certainly an upside possibility for the future. To give an idea of the potential magnitude of this effect, using the elasticities estimated in Jaumotte and others (2016), the increase in the migrant share of the working age population, estimated at 4 percentage points, could lead to an increase in long run GDP per capita of 8 percent. Given that these papers are almost exclusively focused on advanced economies, this should only be considered an illustrative number.
Global fragmentation of trade and geopolitical tensions represent a downside risk to Georgian growth. These recent positive flows are a result of larger economic forces which are unlikely to remain beneficial to Georgia. As outlined in the Spring WEO (2023), increasing geopolitical tensions are a risk to both foreign direct investment and trade. Due to its location and desire for Euro-Atlantic integration, Georgia could be exposed to geopolitical tensions, for example between Russia and the EU. Should these tensions persist, it may be increasingly difficult for Georgia to remain economically integrated with both economies, with negative consequences for potential growth.
1/ The SVAR looks at aggregate relationships and so does not outline the precise channels through which exchange rate appreciation operates. Two potential channels are (1) by reducing the cost of imported inputs into production and (2) balance sheet effects due to the high rate of dollarization in the economy.B. Drivers of Growth in Georgia
Productivity
4. Productivity has grown steadily over the past decade. Output per worker, a simple measure of productivity, averaged 4.2 percent growth (y/y) from 2010–2023 (Figure 4). However, in 2020 Georgia adopted updated ILO standards, the primary effect of which was to designate subsistence farmers, who had previously been counted as self-employed, as inactive. This lowered employment by roughly 450,000, lowered labor participation, and raised unemployment. This has a significant impact on productivity statistics; using the old methodology annual output per worker growth averaged 4.8 percent over this period. To allow for comparisons over time and internationally, the following analysis uses the old methodology applied up to 2023, but the broad findings are robust to using either methodology.5
Output per Worker Growth in Georgia
Citation: IMF Staff Country Reports 2024, 136; 10.5089/9798400275081.002.A002
Source: GEOSTAT, IMF staff calculations.Output per Worker by Sector
Citation: IMF Staff Country Reports 2024, 136; 10.5089/9798400275081.002.A002
Source: GEOSTAT, IMF staff calculations.Employment Share by Sector
(percent)
Citation: IMF Staff Country Reports 2024, 136; 10.5089/9798400275081.002.A002
Source: GEOSTAT, IMF staff calculations.5. Structural change has been a key driver of growth. About one-third of growth in output per worker over this period can be attributed to structural change as a declining share of workers required in agriculture has freed up labor to move into higher productivity industry and services, where output per worker is roughly 7.5 times higher (Figure 5). The share of employment in agriculture has fallen from 50 percent in 2003 to 37 percent in 2022, with the vast majority of this being absorbed into services employment, where the share of employment rose from 43 percent to 54 percent (Figure 6).
6. Productivity growth within services has also been driven by a shift to more productive sectors, which accounts for close to two-thirds of Georgia’s growth since 2010. In 2010, 83 percent of services workers worked in what can be broadly defined as public sector or administrative roles. By 2022 this had fallen to just 45 percent as the share of services accounted for by higher productivity sectors such as construction, retail and professional services expanded substantially (Figure 7). The rise in employment in these more productive sectors has caused a convergence in output per worker between sectors, with only the relatively small and high barrier to entry professional services industry maintaining a significant output differential per worker (Figure 8).
7. Structural change will remain a core driver of Georgia’s growth given Georgia’s high levels of agricultural employment. However, as productivity across industry and subsectors of services converge, growth will need to be driven increasingly by raising efficiency and innovation as opposed to pure reallocation.
Distribution of Services Employment Across Subsectors, 2010 and 2022 (percent)
Citation: IMF Staff Country Reports 2024, 136; 10.5089/9798400275081.002.A002
Source: GEOSTAT and IMF staff calculations.Output per Worker across Services Subsectors, 2010 and 2022
Citation: IMF Staff Country Reports 2024, 136; 10.5089/9798400275081.002.A002
Source: GEOSTAT and IMF staff calculations.Agricultural Productivity and Structural Transformation
9. Structural change has been a key driver of growth, but Georgia still has a larger share of agricultural employment than most neighbors. While the share of workers in agriculture has fallen from 50 percent in 2003 to 37 percent in 20226 the share of workers is significantly higher than most comparator nations, despite having a lower share of agricultural output in GDP than some others (Figure 9). This suggests that there is significant scope for further shifts of workers out of agriculture to more productive sectors; close to two-thirds of Georgia’s agricultural workers, roughly 400,000 individuals, are subsistence farmers who sell less than half of their produce on the market. To maintain this process of structural change, agricultural productivity in Georgia must continue to rise.
Agricultural Output and Employment across Countries, 2022
Citation: IMF Staff Country Reports 2024, 136; 10.5089/9798400275081.002.A002
Source: World Bank Development Indicators.10. Agriculture in Georgia is dominated by small low-productivity farms. Almost 80 percent of agricultural holdings in Georgia are less than 1 hectare in size and 99 percent are less than 5 hectares. This is in part a consequence of land distribution in the 1990s and subsequent fragmentation through inheritance. While small farms can be productive (Foster and Rosenzweig, 2022), this has historically been hindered by limited land registration and weak rural land markets. In 2022 Land registration was around 40 percent and this fell to 20 percent in rural areas. Low registration was in part due to fears of losing social allowances, losing land to lenders, and higher taxation (World Bank, 2022b). An absence of rural land markets limited growth, both by hindering selling land to those who are more invested in making productive use of it and by denying holders of the land adequate collateral to access credit for investment. Banks continued to perceive agriculture as risky due to information asymmetries, inadequate collateral, and production risks (World Bank, 2020, 2022b). Consequently, despite having fertile land and favorable climate conditions for a range of crops, yields per hectare are substantially below global averages and have not shown marked improvement in over a decade (World Bank 2022b).
11. Significant progress has been made in registering land since 2022 though. The National Agency of the Public Registry (NAPR) has been engaged in systematic land registration, building on a World Bank pilot program started in 2017. Over 2.8 million plots have been registered with the aim for all land to be registered by the end of 2024. As land registration is completed, it is hoped that this supports consolidation of land and eases access to credit raising agricultural productivity.
12. While improvements have been made on land registration, restrictions on land ownership and poor public land management discourage investment. Sixty-four percent of registered agricultural land is under state ownership with unclear responsibility for land management and allocation between national and local authorities (World Bank, 2022b). This leads to underinvestment in soil quality and infrastructure maintenance, due to the resultant tenure insecurity and uncertainty. The privatization process for land in state ownership has practically ceased since 2010. Foreign investment is restricted even further with a constitutional amendment banning the selling of agricultural land to foreign citizens, meaning that in 2022 just 0.3 percent of FDI in Georgia was in agriculture.
13. As non-agricultural employment grows, productivity growth will need to increasingly come from raising efficiency, as opposed to pure reallocation. As highlighted above, much of the growth in productivity over the past decade has been due to the reallocation within services towards high productivity subsectors. However, as this process has gone on, the output per worker across these sub-sectors has converged dramatically, reducing the scope for this process to continue. The outlier to this has been the professional services industry, but this has high educational barriers to entry and so has limited ability to grow its share of employment dramatically.
14. Firm-level evidence suggests that some of Georgia’s most productive firms are not growing sufficiently. Research by the World Bank using firm-level micro-data, suggests that the majority of employment growth in Georgian firms is in large firms that are relatively less productive, while smaller high productivity firms are failing to grow (World Bank, 2022a). This not only mechanically lowers productivity through poor allocation of workers, but also suggests that larger firms are not being subjected to the competitive pressures they need to encourage them to raise their efficiency.
15. Ensuring access to finance is key for encouraging a competitive and dynamic private sector. Georgia has done much to liberalize product markets and create a strong environment for private sector growth. However, its banking sector, while relatively well developed in comparison to the region, is highly concentrated with the largest two banks accounting for 79 percent of total deposits and 76 percent of total loans. This level of concentration could in part explain the high implicit spreads7 experienced in Georgia (Figure 10) and the difficulty for some firms in accessing finance. In the World Bank’s Enterprise Survey (ES – conducted in 2023), access to finance was listed as the third largest obstacle to firms, with 16.5 percent pointing to it as their largest obstacle. In the World Economic Forum’s Global Competitiveness Index (GCI), Georgia’s financial system ranks 91st out of 140 countries in terms of development. Aggregate access to credit in Georgia appears reasonable with relatively high domestic credit to GDP and fewer firms reporting being credit constrained than the average for Europe and Central Asia. However, in comparison to this same group of firms, a substantially higher share of loans require collateral, and the amount of collateral is also higher.
Implicit Spreads in Middle East and Caucuses Countries’ Banking Sectors
Citation: IMF Staff Country Reports 2024, 136; 10.5089/9798400275081.002.A002
Source: Fitch, IMF staff calculations.16. Further development of infrastructure could also help to raise productivity. Georgia’s transport and logistics costs are high, despite a modern customs administration, in part due to poor quality infrastructure – for example Georgia ranked 83rd in transport infrastructure in the last GCI. This represents a bottleneck to growth for all sectors of the Georgian economy. High transport costs not only raise the costs of inputs into production, lowering productivity, but also insulate firms from competition both from foreign firms as well as other domestic firms in different regions. This is reflected in the high non-tariff barriers faced by Georgia (Figure 11). Poor transport and logistics infrastructure are partially captured in non-tariff barrier calculations as they represent an important friction to cross border trade. While much effort has been put into developing free trade agreements, such as the Deep and Comprehensive Free Trade Agreement with the EU, their benefits will be limited by these significant non-trade barriers.
Cost of Non-Tariff Trade Barriers
(percent Ad-Valorem equivalent)
Citation: IMF Staff Country Reports 2024, 136; 10.5089/9798400275081.002.A002
Source: UNCTAD, COMTRADE, IMF staff calculations.Labor
Labor supply in Georgia faces many constraints: a declining population, low rural participation, and high structural unemployment.
17. Georgia’s population is estimated to fall by 2.6 percent by 2030 (United Nations, 2022), relative to 2014–2019, when population growth was broadly flat. This represents a drag on the working age population of around 0.3 percentage point per year. This decline in population is almost entirely driven by outward migration. In the UN’s no migration scenario (Figure 12), the population falls by just 0.3 percent over the same period. These calculations do not include the recent increase in population due to war-related migration, however. As there is unlikely to be an ongoing flow of migrants, this factor will have little impact on the projected drag from future net migration captured in the UN analysis.
Georgia Population Projection
(thousands)
Citation: IMF Staff Country Reports 2024, 136; 10.5089/9798400275081.002.A002
Source: UN, 2022.18. Migration and an aging population are also likely to lead to a drop in participation over the same period. Net migration in Georgia leads to an aging population profile as those who leave are typically younger and more likely to be in their prime working years, compared to those who migrate to Georgia. Georgia’s population is also aging even without the role of migration: from 2022 to 2030 the median age is expected to rise from 36.5 to 38.6, only a quarter of which is because of net migration. As older workers are less likely to participate in the labor market, this is projected to be a drag on participation and aggregate labor supply by around 0.1–0.2 percentage point per year.
19. Rural participation in the labor market is low if subsistence farmers are excluded from the labor force. The labor force participation rate in rural areas, using Georgia’s updated methodology, is roughly 5 percentage points lower than in urban areas. The change in methodology led to a drop in recorded aggregate participation of around 11 percentage points and a drop of 24 percentage points in rural areas (Figure 13). In micro-regressions (controlling for a range of demographic information), this is almost entirely accounted for by the lower educational attainment seen in rural areas – 58 percent of individuals in urban areas have either tertiary or vocational education, compared to 35 percent in rural areas (Figure 14). This should not be treated as causal though – as it is hard to disentangle an individual’s educational choices from their expected future working situation. It may be that individuals work on smallholder farms because their education gives them little alternative, however, it may also be that they are required to leave education to go and work on a farm to support their family, or even that they choose not to pursue further education, because they know that they will be working on a family farm where it is not required.
Change in Participation due to Methodological Break (percent)
Citation: IMF Staff Country Reports 2024, 136; 10.5089/9798400275081.002.A002
Source: GEOSTAT.Highest Education Achieved for Individuals aged 16+ by Urban/Rural (percent)
Citation: IMF Staff Country Reports 2024, 136; 10.5089/9798400275081.002.A002
Source: LFS 2022.20. How subsistence farmers are recorded is relatively immaterial to the relevant policy solutions. Regardless of whether subsistence farmers are counted as inactive or employed with effectively zero (marketed) output, the central policy issue is that same. There is a very large group of individuals currently not engaged in highly productive work. Finding ways to raise this groups’ productivity, either in farming or by helping them join the wider labor force, will be key to maintaining Georgian growth.
21. Unemployment in Georgia is high. Unemployment in Georgia in 2023 was 16.4 percent down from 17.3 percent in 2022. Again Georgia’s 2020 update to labor market definitions changed this measure considerably (causing it to increase by close to 7 percentage points), but even accounting for this, Georgia’s unemployment, using more internationally comparable methods (for 2022), is likely above 10 percent and higher than many comparator countries (Figure 15).
Unemployment Rates, 2022 (percent)
Citation: IMF Staff Country Reports 2024, 136; 10.5089/9798400275081.002.A002
Source: ILO Modelled Estimates.22. A large component of unemployment is accounted for by the long-term unemployed. In 2022 close to a fifth of unemployed workers reported having been out of work for over four years. Relative to other unemployed workers, these long-term unemployed workers are in general older, less educated, and more likely to live in rural areas. These workers report mainly being supported by family members, though around a fifth also receive a state allowance. The recent recovery in the economy, which has seen the unemployment rate fall from 20.6 percent in 2021 to 17.3 percent in 20228 has seen no drop in the number of these longer-term unemployed workers, suggesting these individuals are to a degree disconnected from current labor market conditions and likely represent structural unemployment.
23. Youth unemployment, linked in part to low educational attainment, is the other major contributor to structural unemployment. Twenty-nine percent of those aged 30 and under in the labor market are unemployed representing about a third of unemployment in Georgia. Around two-thirds of these individuals have no previous work experience. Educational achievement can explain this to some degree. The quality of secondary education in Georgia is low, for example according to the 2023 Programme for International Student Assessments (PISA) 67 percent of the country’s 15-year-old students are categorized as ‘low performing’ at reading, compared to the OECD average of 26 percent. For those 30 and under with either vocational or tertiary education, youth unemployment falls from 35 percent (for those with secondary education or less) to 21 percent. The fact that Georgia has a relatively small manufacturing sector, which in other countries has absorbed large amounts of unskilled labor (Rodrik, 2016), likely compounds the impact of Georgia’s low educational outcomes on unemployment. This can be seen in Georgia’s State Employment Support Agency’s (SESA) monitoring of labor market vacancies, where those trying to recruit for plant and machine operators report almost no shortage of skills, whereas those recruiting services and sales workers report substantial recruiting difficulties related to a lack of relevant skills. The role of education in Georgia’s high unemployment should not be overstated though—the unemployment rate in Georgia in 2022 for those with a tertiary or vocational education was still 13 percent.
24. Philips curve-based estimates of equilibrium unemployment in Georgia are around 18 percent. The rate of unemployment which is consistent with target inflation is sometimes referred to as U* or the non-accelerating inflation rate of unemployment (NAIRU). This rate captures the level to which unemployment can sustainably fall without structural reforms. To estimate this empirically, staff use the model of Chan, Koop, and Potter (2016), which is a bounded bivariate model with latent states, where both inflation and unemployment are specified as deviations from trends. These trends are unobserved states to be estimated, which can be interpreted as trend inflation and the NAIRU. The model is inspired by the Phillips curve in that inflation is driven by deviations of unemployment from the NAIRU and inflation deviations from trend. It is flexible in that the corresponding parameters are allowed to vary over time. The model is amended to focus on wage inflation rather than price inflation.
25. Labor market flows however suggest unemployment could stabilize at the lower level of 15 percent. An alternative approach to analyzing unemployment is to use labor market flows to project future steady state unemployment as in Smith (2011). Labor market flows are the rates at which individuals in the economy flow between the different states of employment, unemployment, and inactivity. Arguably these flows capture the underlying dynamics of the labor market and by using them one can project the level at which unemployment will settle. Exploiting the repeated cross-section structure of the Georgian Labor Force Survey, staff constructed a longitudinal dataset which measures these various flow rates and found that the current momentum in the Georgian labor market would lead to a steady state unemployment rate of 15 percent.
26. Given the structural drivers of unemployment outlined above and our NAIRU and steady-state estimates, there appears little to no spare capacity in the labor market for further growth without policy intervention. Both the Philips curve model and flows-based approach to analyzing unemployment have shortcomings that should be noted. The Philips curve approach will be slow to detect structural changes in the NAIRU. However, the flows-based approach takes no account of the wage and inflation implications of the steady state unemployment which it implies (hence it being a steady state and not an estimate of the NAIRU). Given the strength of wage growth in the labor market currently, it is likely that tight monetary policy will be required to slow down the current labor market dynamics the 15 percent steady state is based on. On balance, there seems to be little spare capacity in the labor market currently, but both our equilibrium unemployment rate estimates are highly uncertain and so should be treated cautiously.
Capital
27. Investment has been strong in Georgia, averaging 26 percent of GDP since 2010, and accounts for most of the growth over this period (Figures 2 and 16). This level of investment is broadly in line with the average investment levels of other countries in Europe and Central Asia (World Bank 2022a). Investment fell however in 2021 to 19 percent of GDP and remained low in 2022. This was driven almost exclusively by domestic private investment, as foreign direct investment and public investment remained in line with their historical shares of GDP. On the back of continuing strong growth, investment recovered in 2023 to 25.8% of GDP, with private domestic investment estimated to have accounted for 11 percentage points of this.
28. To sustain this high level of investment, Georgia must maintain a sufficient national savings rate. Domestic savings in low income and emerging economies are associated with a higher level of growth and FDI (Aghion and others, 2014). Georgia has consistently had higher investment than savings, sustained by a current account deficit which has averaged 9.4 percent of GDP since 2010. Prior to the pandemic this had closed to around 6 percent, a level staff currently estimate to be sustainable over the medium term (IMF first SBA review, 2022), due to gross national savings rising to an average of 21 percent from 2017–2019. The pandemic led to a large decline in savings, that have since only partially recovered (Figure 17); savings must fully recover to sustainably maintain investment. Household survey data suggests that the savings rate of households didn’t fall over this period and so it is likely that the fall and subsequent recovery is in large part again a function of firm balance sheets recovering. This is consistent with the low labor share in Georgia and the high share of income that goes to corporates.
Investment as a share of GDP
(percent)
Citation: IMF Staff Country Reports 2024, 136; 10.5089/9798400275081.002.A002
Source: GEOSTAT, IMF staff calculations.Savings in Georgia (percent)
Citation: IMF Staff Country Reports 2024, 136; 10.5089/9798400275081.002.A002
Source: GEOSTAT, World Bank, IHS, HIES, IMF staff calculations.29. While Georgia’s high level of investment looks sustainable, there could also be risks from political factors. Investment can be sensitive to uncertainty and political instability (Julio and Yook 2012) and in Georgia political instability was ranked as the largest obstacle to the business environment in the WBES. Georgia faces several large uncertainties over the near future, with elections in 2024, and the possibility of continued pressures from maintaining economic ties with both the EU and Russia. It is possible that any of these could result in a deterioration of the economic climate and a hit to investment. A clear and predictable policy environment is also important for investment and there could be scope for improvement, as seen in the recent decision on short notice to reverse course on the opening of the electricity market in 2023.
C. Assessment of Growth and Policy Recommendations
30. Pre-pandemic trend growth in Georgia was likely around 5 percent; however, demographic headwinds, in part fueled by outward migration, are likely to lower this to around 4.5 percent over the next ten years.9 This growth will be driven by continued structural change and high levels of investment. However, unresolved policy issues, particularly around land registration and markets, could slow this process if unaddressed. And efforts will also be required to ensure dynamic competitive markets are supported in order to maintain productivity growth in the manufacturing and service sectors.
31. The greatest opportunities to raise growth above this level are focused on raising agricultural productivity. Completing land registration, promoting land consolidation, resolving issues around state management of land, and allowing foreign ownership of land are all policies which help to accelerate the process of structural transformation. Staff estimate that substantial policy reforms in this area could sustainably raise trend growth by 0.5 percentage points per year over the medium term.
32. A focus on competitive markets will also be necessary to maintain growth outside of agriculture. The National Bank of Georgia (NBG) has already made the promotion of competition in finance part of its 2023–2025 supervisory strategy. Actions in this strategy, such as facilitating access to expensive infrastructure and data to support new market entrants will be helpful. It will also be important to limit any further concentration of the banking system which might further limit competition and access to finance, especially to young dynamic firms. Infrastructure investment, particularly in transport and logistics, will also have high returns and support productivity and competition. Policies such as these are broadly seen as a continuation of current government policy and so are necessary to maintain the expected 4.5–5 percent trend growth; raising government investment as a share of GDP would be required to go beyond these figures.
33. In the longer run improved educational outcomes will be vital to raise growth, but the impact is only likely to be realized over time. Educational outcomes, particularly in a services-oriented economy such as Georgia, are key to driving growth in the long term. Higher quality education would reduce youth unemployment, increase rural participation, and allow an expansion of high productivity industries such as finance, professional services, and IT. Policies to raise educational outcomes by addressing current issues such as low teacher quality and the significant gap between rural and educational outcomes will need to be put in place. However, the time frame for these kinds of reforms to be (i) implemented, (ii) raise educational outcomes and then (iii) meaningfully affect the labor force enough impact macroeconomic statistics, is significant, and as such these policies are unlikely to raise growth within the short to medium term.
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Prepared by Will Abel (MCD).
This is based on the NBG’s capital stock calculation, which uses a perpetual inventory methodology. However, it is robust to alternative reasonable assumptions for the depreciation rate of capital.
Grant and Chan (2017) estimate an unobserved component (UC) model where trend growth follows a second order Markov process. They show that this flexible approach can reconcile a range of filters and more accurately match the data compared to both standard UC models (such as Morley and others, 2003) and the HP filter. For example, it relaxes the implicit assumption in the HP filter that the cyclical components of GDP are serially uncorrelated, resulting in cyclical patterns in estimates of trend growth.
These findings are consistent with The World Bank Country Economic Memorandum for Georgia (2022), which estimates trend growth to be around 4 percent and argues that “further reforms will be required to keep GDP growth between 4–4.5 percent”. The latter was produced prior to GEOSTAT’s revisions of GDP from 2003–2023, which were released in February 2024. The revisions raised GDP growth by about 0.5 percentage points per year over this period.
Sectoral employment breakdowns and internationally comparable statistics are only available up to 2022.
These figures have been modified to maintain the consistency of the time series across the 2020 methodological break.
The implicit spread aims to capture the difference between interest rates on loans and deposits. It is implicit as it is constructed from a range of products using detailed Fitch product level data, without a single defined “deposit” and “loan” rate.
Micro-data is not yet available for 2023, so this level of detailed analysis is only available up to 2022.
As noted above, these estimates exclude the potentially positive effect on potential growth from recent inward migration given uncertainty around the length of time migrants will stay and the scale of their impact.
